FAIR VALUE

General

As of June 30, 2014, $13.6 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the fair value option. Approximately $10.2 million of these financial instruments were measured using quoted market prices for identical instruments or Level 1 inputs. Approximately $11.0 billion of these financial instruments were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $2.6 billion of these financial instruments were measured using model-based techniques, or Level 3 inputs, and represented approximately 19.4% of total assets measured at fair value and approximately 2.4% of total consolidated assets.

Fair value is defined in GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:

•Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments or futures contracts.

•Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.

•Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company attempts to use quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or discounted cash flow models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or discounted cash flow models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.

NOTE 16. FAIR VALUE (continued)

The Company values assets and liabilities based on the principal market on which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.

Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.

The Bank's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including our Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.

The Company reviews the assumptions utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a change in fair value level hierarchy has occurred. Transfers in and out of Levels 1, 2 and 3 are considered to be effective as of the end of the quarter in which they occur.

There were no transfers between Levels 1, 2 and 3 during the three-month period ended June 30, 2014 for any assets or liabilities valued at fair value on a recurring basis. During the six-month period ended June 30, 2014, the Company transferred certain of its asset-backed securities from Level 2 to Level 3 due to limited price transparency in connection with their limited trading activity. There were no other transfers between Levels 1, 2 and 3 during the six-month period ended June 30, 2014. There were no transfers between Levels 1, 2 and 3 during the three-month and six-month periods ended June 30, 2013 for any assets or liabilities valued at fair value on a recurring basis.

NOTE 16. FAIR VALUE (continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of June 30, 2014 and December 31, 2013.



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2014
	(in thousands)
Financial assets:
US Treasury and government agency securities	$	—	$	8,000	$	—	$	8,000
Corporate debt	—		2,234,349		—		2,234,349
Asset-backed securities	—		1,360,789		1,243,872		2,604,661
Equity Securities	10,163		—		—		10,163
State and municipal securities	—		1,830,276		—		1,830,276
Mortgage backed securities	—		4,987,593		—		4,987,593
Total investment securities available-for-sale	10,163		10,421,007		1,243,872		11,675,042
Trading securities	—		125,116		—		125,116
Retail installment contracts held for investment	—		—		1,273,072		1,273,072
Loans held for sale	—		166,616		—		166,616
Mortgage servicing rights	—		—		124,118		124,118
Derivatives:
Fair value	—		855		—		855
Cash Flow	—		2,102		—		2,102
Mortgage banking interest rate lock commitments	—		—		4,092		4,092
Customer related	—		214,918		—		214,918
Foreign exchange	—		7,593		—		7,593
Mortgage servicing	—		722		—		722
Interest rate cap agreements	—		46,631		—		46,631
Other	—		5,902		10		5,912
Total financial assets	$	10,163	$	10,991,462	$	2,645,164	$	13,646,789
Financial liabilities:
Derivatives:
Fair value	$	—	$	2,303	$	—	$	2,303
Cash flow	—		44,281		—		44,281
Mortgage banking forward sell commitments	—		3,151		—		3,151
Customer related	—		184,624		—		184,624
Total return swap	—		—		285		285
Foreign exchange	—		6,199		—		6,199
Mortgage servicing	—		188		—		188
Interest rate swaps	—		24,240		—		24,240
Option for interest rate cap	—		46,677		—		46,677
Other	—		6,727		76		6,803
Total financial liabilities	$	—	$	318,390	$	361	$	318,751

NOTE 16. FAIR VALUE (continued)



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2013
	(in thousands)
Financial assets:
US Treasury and government agency securities	$	—	$	24,997	$	—	$	24,997
Corporate debt	—		2,218,180		—		2,218,180
Asset-backed securities	—		2,679,290		52,940		2,732,230
Equity securities	9,841		—		—		9,841
State and municipal securities	—		1,850,149		—		1,850,149
Mortgage backed securities	—		4,810,843		—		4,810,843
Total investment securities available-for-sale	9,841		11,583,459		52,940		11,646,240
Loans held for sale	—		128,949		—		128,949
Mortgage servicing rights	—		—		141,787		141,787
Derivatives:
Fair value	—		1,073		—		1,073
Cash flow	—		4,803		—		4,803
Mortgage banking interest rate lock commitments	—		—		547		547
Mortgage banking forward sell commitments	—		2,101		—		2,101
Customer related	—		225,811		—		225,811
Foreign exchange	—		11,631		—		11,631
Mortgage servicing rights	—		6,155		—		6,155
Other	—		4,750		14		4,764
Total financial assets	$	9,841	$	11,968,732	$	195,288	$	12,173,861
Financial liabilities:
Derivatives:
Fair value	$	—	$	1,924	$	—	$	1,924
Cash flow	—		58,381		—		58,381
Customer related	—		198,669		—		198,669
Total return swap	—		—		285		285
Foreign exchange	—		9,745		—		9,745
Mortgage servicing rights	—		488		—		488
Other	—		4,099		112		4,211
Total financial liabilities	$	—	$	273,306	$	397	$	273,703

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or certain impairment measures. Assets measured at fair value on a nonrecurring basis that were still held on the balance sheet were as follows:

NOTE 16. FAIR VALUE (continued)



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in thousands)
June 30, 2014
Impaired loans held for investment	$	—	$	94,685	$	64,229	$	158,914
Foreclosed assets	—		29,840		—		29,840
Repossessed vehicle inventory	—		140,792		—		140,792

December 31, 2013
Impaired loans held for investment	$	—	$	149,796	$	137,356	$	287,152
Foreclosed assets	—		57,431		—		57,431

Valuation Processes and Techniques

Impaired loans held for investment represents the recorded investment of impaired commercial loans for which the Company periodically records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties, which are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field exams and internal calculations are considered Level 3 inputs. The inputs in the internal calculations include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral, and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The total carrying value of these loans was $111.9 million and $209.1 million at June 30, 2014 and December 31, 2013, respectively.

Foreclosed assets represents the recorded investment in assets taken in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real property and generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.

The Company estimates the fair value of its repossessed vehicle inventory using historical auction rates and current market levels of used car prices.

Fair Value Adjustments

The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:



	Statement of Operations Location	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
		(in thousands)
		2014			2013			2014			2013
Impaired loans held for investment	Provision for credit losses	$	(9,656	)	$	(29,756	)	$	(10,200	)	$	(14,324	)
Foreclosed assets	Other administrative expense	(129		)	(860		)	(352		)	(2,404		)
Repossessed vehicle inventory	Provision for credit losses	579,765			—			684,699			—
		$	569,980		$	(30,616	)	$	674,147		$	(16,728	)

NOTE 16. FAIR VALUE (continued)

Level 3 Rollforward for Recurring Assets and Liabilities

The tables below present the changes in all Level 3 balances for the three-month and six-month periods ended June 30, 2014 and 2013, respectively.



Three-Month Period Ended June 30, 2014
	Investments Available-for-Sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, March 31, 2014	$	1,225,012		$	1,516,353		$	134,775		$	1,350		$	2,877,490
Gains in other comprehensive income	822			—			—			—			822
Gains/(losses) in earnings	—			215,377			(6,893		)	2,284			210,768
Additions/Issuances	102,326			—			2,129			—			104,455
Settlements⁽¹⁾	$	(84,288	)	(458,658		)	$	(5,893	)	$	107		$	(548,732	)
Balance, June 30, 2014	$	1,243,872		1,273,072			$	124,118		$	3,741		$	2,644,803
Changes in unrealized losses included in earnings related to balances still held at June 30, 2014	$	—		$	—		$	(6,893	)	$	(80	)	$	(6,973	)

Six-Month Period Ended June 30, 2014
	Investments Available-for-sale			Retail Installment Contracts Held for Investment			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2013	$	52,940		$	—		$	141,787		$	164		$	194,891
Gains in other comprehensive income	1,870			—			—			—			1,870
Gains/(losses) in earnings	—			359,430			(11,352		)	3,330			351,408
Additions/Issuances	102,326			1,870,383			4,003			—			1,976,712
Settlements⁽¹⁾	(84,724		)	(956,741		)	(10,320		)	247			(1,051,538		)
Transfers into level 3	1,171,460			—			—			—			1,171,460
Asset Balance, June 30, 2014	$	1,243,872		$	1,273,072		$	124,118		$	3,741		$	2,644,803
Changes in unrealized losses included in earnings related to balances still held at June 30, 2014	$	—		$	—		$	(11,352	)	$	(215	)	$	(11,567	)


(1)	Settlements include charge-offs, prepayments, paydowns and maturities.

NOTE 16. FAIR VALUE (continued)



Three-Month Period Ended June 30, 2013
	Investments Available for Sale			MSRs			Derivatives			Total
	(in thousands)
Balance, March 31, 2013	$	44,818		$	109,163		$	11,022		$	165,003
Gains in other comprehensive income	9,968			—			—			9,968
Gains/(losses) in earnings	—			23,270			(21,098		)	2,172
Additions/Issuances	—			10,874			—			10,874
Settlements⁽¹⁾	(417		)	(5,166		)	107			(5,476		)
Asset Balance, June 30, 2013	$	54,369		$	138,141		$	(9,969	)	$	182,541
Changes in unrealized gains included in earnings related to balances still held at June 30, 2013	$	—		$	23,270		$	50		$	23,320

Six-Month Period Ended June 30, 2013
	Investments Available for Sale			MSRs			Derivatives			Total
	(in thousands)
Balance, December 31, 2012	$	43,374		$	92,512		$	14,722		$	150,608
Gains in other comprehensive income	11,824			—			—			11,824
Gains/(losses) in earnings	—			33,366			(24,901		)	8,465
Additions/Issuances	—			24,046			—			24,046
Settlements⁽¹⁾	(829		)	(11,783		)	210			(12,402		)
Balance, June 30, 2013	$	54,369		$	138,141		$	(9,969	)	$	182,541
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2013	$	—		$	33,366		$	(33	)	$	33,333

(1) Settlements include prepayments, paydowns and maturities.

Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities

Following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis.

Investment securities available for sale

The Company utilizes a third-party pricing service to value its investment portfolio. Our primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by our primary servicer, other trusted market sources are utilized. The vendors the Company uses provide pricing services on a global basis. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities. Securities not priced by one of the pricing vendors may be valued using a dealer quote.

Actively traded quoted market prices for investment securities available-for-sale, such as government agency bonds, corporate debt, and state and municipal securities, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid-level pricing in these markets. The third-party vendors use a variety of methods when pricing securities that incorporate relevant market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions.

NOTE 16. FAIR VALUE (continued)

Collateralized loan obligations ("CLOs") are initially valued by the provider using discounted cash flow models which consider inputs such as default correlation, credit spread, prepayment speed, conditional default rate and loss severity. The price produced by the model is then compared to recent trades for similar transactions. If there are differences between the model price and the market price, adjustments are made to the model so the final price approximates the market price. These investments are, therefore, considered Level 2.

Certain asset-backed securities ("ABS") are valued using discounted cash flows. The discounted cash flows are obtained from a third party pricing service using observable market data and therefore are classified as Level 2. Other ABS which could not be valued using a third party pricing service are valued using an internally developed discounted cash flow model. When estimating the fair value using this model, the Company uses its best estimate of the key assumptions which include the discount rates and forward yield curves. The Company uses comparable bond indices based on industry, term, and rating to discount the expected future cash flows. Determining the comparability of assets involves significant subjectivity related to asset type differences, cash flows, performance and other inputs. The inability of the Company to corroborate the fair value of the ABS due to the limited available observable data on these ABS resulted in a fair value classification of Level 3.

The investments in sale-leaseback security is thinly traded, and the Company determined the estimated fair value of this security by evaluating pricing information from a combination of sources such as third-party pricing services, third-party broker quotes for certain securities and other independent third-party valuation sources. These quotes are benchmarked against similar securities that are more actively traded to assess the reasonableness of the estimated fair value. The fair market value estimate assigned to this security assumes liquidation in an orderly fashion and not under distressed circumstances. Significant unobservable inputs include third-party quotes and pricing on comparable securities that are more actively traded, as well as management-determined comparability adjustments. Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement.

The Company's equity securities are priced using net asset value per share, which is validated with a sufficient level of observable activity. Since the price is observable and unadjusted, these investments are considered Level 1.

Gains and losses on investments are recognized in the Condensed Consolidated Statements of Operations through Net gain on sale of investment securities.

Trading Securities

Investments that are purchased principally for the purpose of selling them in the near term are classified as trading securities and carried at fair value. These securities are considered Level 2. Gains and losses on these trading securities are recognized in the Condensed Consolidated Statements of Operations through Mortgage banking income, net.

Retail Installment Contracts Held for Investments

For certain retail installment contracts held for investments within loans held for investment, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using the discounted cash flow model. When estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions which includes historical default rate and adjustments to reflect voluntary prepayments, prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding of debt issuance and recent historical equity yields, and recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3.

Loans Held for Sale

The fair values of LHFS are estimated using published forward agency prices to agency buyers such as the FNMA and the FHLMC. The majority of the residential LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.

NOTE 16. FAIR VALUE (continued)

These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. See further discussion below in the Fair Value Option for Financial Assets and Financial Liabilities section below.

Mortgage servicing rights

The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs are changes in anticipated loan prepayment rates ("CPRs") and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Mortgage banking income. See further discussion on MSRs in Note 8.

Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:


•	A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $4.8 million and $9.3 million, respectively, at June 30, 2014.


•	A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.5 million and $8.7 million, respectively, at June 30, 2014.

Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve.

Derivatives

The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount SHUSA would receive or pay to terminate the contracts or agreements, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.

The Company incorporates credit valuation adjustments in the fair value measurement of its derivatives to reflect the respective counterparty's nonperformance risk in the fair value measurement of its derivatives, except for those derivative contracts with associated credit support annexes which provide credit enhancements, such as collateral postings and guarantees.

NOTE 16. FAIR VALUE (continued)

The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Certain of the Company's derivatives utilize Level 3 inputs, which are primarily related to mortgage banking derivatives-interest rate lock commitments.

The discounted cash flow model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company‘s loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. Significant increases (decreases) in any of these inputs in isolation would result in a significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).

Gains and losses related to derivatives affect various line items in the Condensed Consolidated Statements of Operations. See Note 10 for a discussion of derivatives activity.

Level 3 Inputs - Significant Recurring Assets and Liabilities

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring assets and liabilities.



	Fair Value at June 30, 2014		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
	(in thousands)
Financial Assets:
Asset-backed securities
Financing Bonds	$	1,190,008	Discounted Cash Flow	Discount Rate ⁽¹⁾	0.51%-2.01% (1.24%)
Sale-leaseback securities	$	53,864	Consensus Pricing ⁽²⁾	Offered quotes ⁽³⁾	136.47	%
Retail installment contracts held for investment	$	1,273,072	Discounted Cash Flow	ABS ⁽⁴⁾	40.00	%
				Prepayment rate (CPR) ⁽⁵⁾	11.00	%
				Discount Rate ⁽⁶⁾	5.29%-12.00% (7.12%)
				Recovery Rate ⁽⁷⁾	25.00%-47.00% (42.05%)
Mortgage servicing rights	$	124,118	Discounted Cash Flow	Prepayment rate (CPR) ⁽⁸⁾	0.54%-39.20% (10.27%)
				Discount Rate ⁽⁹⁾	9.55	%
Mortgage banking interest rate lock commitments	$	4,092	Discounted Cash Flow	Pull through percentage ⁽¹⁰⁾	72.99	%
				MSR value ⁽¹¹⁾	0.690%-1.020% (0.96%)

(1) Based on the applicable term and discount index.

(2) Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices.

(3) Based on the nature of the input, a range or weighted average does not exist. For sale-lease back securities, the Company owns one security.

(4) Based on the historical default rate and adjustments to reflect voluntary prepayments.

(5) Based on the analysis of available data from a comparable market securitization of similar assets.

(6) Based on the cost of funding of debt issuance and recent historical equity yields.

(7) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.

(8) Average CPR projected from collateral stratified by loan type, note rate and maturity.

(9) Based on the nature of the input, a range or weighted average does not exist.

(10) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments.

(11) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.

NOTE 16. FAIR VALUE (continued)

Fair Value of Financial Instruments



	June 30, 2014
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	4,385,648	$	4,385,648	$	4,385,648	$	—	$	—
Available-for-sale investment securities	11,675,042		11,675,042		10,163		10,421,007		1,243,872
Trading securities	125,116		125,116		—		125,116		—
Debentures of FHLB	19,957		20,000		—		20,000		—
Loans held for investment, net	74,212,032		74,442,476		—		94,685		74,347,791
Loans held for sale	290,407		290,736		—		290,736		—
Restricted Cash	2,059,673		2,059,673		2,059,673		—		—
Mortgage servicing rights	124,118		124,118		—		—		124,118
Derivatives	282,825		282,825		—		278,723		4,102

Financial liabilities:
Deposits	49,799,792		49,855,974		42,921,497		6,934,477		—
Borrowings and other debt obligations	38,213,650		38,927,956		—		31,465,006		7,462,950
Derivatives	318,751		318,751		—		318,390		361



	December 31, 2013
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and amounts due from depository institutions	$	4,226,947	$	4,226,947	$	4,226,947	$	—	$	—
Available-for-sale investment securities	11,646,240		11,646,240		9,841		11,583,459		52,940
Debentures of FHLB	19,862		20,000		—		20,000		—
Loans held for investment, net	49,087,340		49,307,888		—		149,796		49,158,092
Loans held for sale	128,949		128,949		—		128,949		—
Restricted Cash	97,397		97,397		97,397		—		—
Mortgage servicing rights	141,787		141,787		—		—		141,787
Derivatives	256,885		256,885		—		256,324		561

Financial liabilities:
Deposits	49,521,406		49,609,846		41,382,336		8,227,510		—
Borrowings and other debt obligations	12,376,624		13,210,300		—		13,210,300		—
Derivatives	273,703		273,703		—		273,306		397

NOTE 16. FAIR VALUE (continued)

Valuation Processes and Techniques - Financial Instruments

The preceding tables present disclosures about the fair value of the Company's financial instruments. Those fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the financial instruments at a certain point in time. Therefore, the derived fair value estimates presented above for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holding of a particular financial instrument, nor does it reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments not measured at fair value on the Condensed Consolidated Balance Sheet:

Cash and amounts due from depository institutions

Cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. The related fair value measurements have been classified as Level 1, since their carrying value approximates fair value due to the short-term nature of the asset.

As of June 30, 2014 and December 31, 2013, the Company had $2.1 billion and $97.4 million, respectively, of restricted cash. Restricted cash is related to cash restricted for investment purposes, cash posted for collateral purposes, cash advanced for loan purchases, and lockbox collections. Cash and cash equivalents, including restricted cash, have maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

Debentures of FHLB

Other investments include debentures of the FHLB. The related fair value measurements have generally been classified as Level 2, as carrying value approximates fair value.

Loans held for investment, net

The fair values of loans are estimated based on groupings of similar loans, including but not limited to stratifications by type, interest rate, maturity, and borrower creditworthiness. Discounted future cash flow analyses are performed for these loans incorporating assumptions of current and projected voluntary prepayment speeds. Discount rates are determined using the Company's current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads (if necessary). Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company's experience, these are Level 3 valuations. Impaired loans are valued at fair value on a nonrecurring basis. See further discussion under "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis" above.

Deposits

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, interest-bearing demand deposit accounts, savings accounts and certain money market accounts, is equal to the amount payable on demand and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors. The fair value of fixed-maturity CDs is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities. The related fair value measurements have generally been classified as Level 1 for core deposits, since the carrying value approximates fair value due to the short-term nature of the liabilities. All other deposits are considered to be Level 2.

NOTE 16. FAIR VALUE (continued)

Borrowings and other debt obligations

Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligation instruments are valued using available market quotes for similar instruments, which contemplates issuer default risk. The related fair value measurements have generally been classified as Level 2. A certain portion of debt, relating to revolving credit facilities, is classified as Level 3. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements and, therefore, are considered to be Level 3.

Commitments to extend credit and standby letters of credit

Commitments to extend credit and standby letters of credit include the value of unfunded lending commitments and standby letters of credit, as well as the recorded liability for probable losses. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments and letters of credit are competitive with other financial institutions operating in markets served by the Company.

The liability for probable losses is estimated by analyzing unfunded lending commitments and standby letters of credit for commercial customers and segregating by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, result in the estimation of the reserve for probable losses.

These instruments and the related reserve are classified as Level 3. The Company believes that the carrying amounts, which are included in Other liabilities, are reasonable estimates of the fair value of these financial instruments.

Fair Value Option for Financial Assets and Financial Liabilities

Loans held for sale

The Company's LHFS portfolio primarily consists of residential mortgages. The Company adopted the fair value option on residential mortgage loans classified as held-for-sale, which allows the Company to record the mortgage loan held-for-sale portfolio at fair market value compared to the lower of cost, net of deferred fees, deferred origination costs, or market. The Company economically hedges its residential LHFS portfolio, which are reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value, but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.

Retail installment contracts held for investment

To reduce accounting and operational complexity, the Company elected the fair value option for certain of its retail installment contracts held for investment in connection with the SCUSA Change in Control. These loans consisted of all of SCUSA’s retail installment contracts accounted for by SCUSA under ASC 310-30 as well as all of SCUSA’s retail installment contracts that were more than 60 days past due at the date of the Change in Control, which collectively had an aggregate outstanding unpaid principal balance of $2.6 billion with a fair value of $1.9 billion at the date of the Change in Control.

NOTE 16. FAIR VALUE (continued)

The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans and retail installment contracts measured at fair value as of June 30, 2014.



	Fair Value		Aggregate Unpaid Principal Balance		Difference
	(in thousands)
Residential mortgage loans held for sale	$	166,616	$	163,045	$	3,571
Nonaccrual loans	—		—		—

Retail installment contracts held for investment	$	1,273,072	$	1,645,493	$	(372,421	)
Nonaccrual loans	114,400		213,250		(98,850		)

Interest income on the Company’s residential mortgage LHFS and retail installment contracts held for investment is recognized when earned based on their respective contractual rates in Interest income on loans in the Condensed Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due for residential mortgage LHFS and more than 60 days past due for retail installment contracts held for investment.

Residential MSRs

The Company elected to account for its existing portfolio of residential MSRs at fair value. This election created greater flexibility with regards to any ongoing decisions relating to risk management of the asset by mitigating the effects of changes to the residential MSRs' fair value through the use of risk management instruments.

The Company's residential MSRs had an aggregate fair value of $124.1 million at June 30, 2014. Changes in fair value totaling a loss of $11.4 million were recorded in net mortgage banking income in the Condensed Consolidated Statement of Operations during the six-month period ended June 30, 2014.